Rapid inflation and robust demand in China and other emerging markets are rippling through to the still recuperating developed world, driving up prices from the gas pump to McDonald's.

As inflation warnings grow more strident, along with the cost of food, energy and other key commodities in regions such as Asia, monetary authorities around the world are renewing their vows to keep an old arch-enemy in check, even if that means higher interest rates when their troubled economies can least afford them.

Signs of trouble are cropping up in all the high-growth areas. Brazil's inflation forecast has been raised weekly since the beginning of December. So far this year, consumer prices in Vietnam are running more than 12 per cent higher than a year ago. In India and Russia, prices are 8 per cent higher. And food costs globally are climbing even faster than in 2007 and 2008, when sharp increases triggered riots in Asia and elsewhere.

Surging inflation in emerging markets, if unchecked, threatens to undermine the global recovery because it would curb growth in those regions, which have driven the global rebound. Countries that export key natural resources, such as Canada and Australia, could be hit hard by shrinking demand if the Chinese juggernaut slows.

Inflationary pressure could also force a hike in interest rates in industrial regions, such as Europe, where the economies are still struggling to climb back from the recession.

Food prices hit a record level last month, according to United Nations statistics, and are forecast to grow by more than 30 per cent this year. In a worst-case situation of critical shortages sketched by Citigroup Inc. analysts, prices could skyrocket by as much as 75 per cent.

"Where you get social disruption is when something happens very quickly and that is what happened with the price spike in 2007-08 and that is what is happening [again]" the British government's chief scientist, John Beddington, told reporters Monday after releasing a report on food security challenges.

It was enough to prompt French President Nicolas Sarkozy to call on fellow G20 leaders to impose new rules to rein in volatile commodity prices. "How can you explain that we regulate money markets and not commodities?" Mr. Sarkozy said.

The epicentre of the inflation earthquake - and the biggest threat to recovery in the industrialized world - may well sit in China, specifically in its export-focused region of Guangdong, where rising labour and material costs and an appreciating yuan are translating into higher prices abroad for Chinese goods.

The minimum wage is set to jump 19 per cent in Guangdong in March, and pay levels have climbed in other production centres for low-level, mostly migrant workers who are facing soaring costs of living.

As a result, the U.S. import price index for China rose 0.9 per cent in the final quarter of 2010, after remaining mostly stable for the previous 18 months.

However, as McDonald's Corp. said it would raise some prices because of rising costs, analysts said this does not mean major price hikes are coming to the local Wal-Mart any time soon or that inflation is about to pose a serious threat in the United States or Canada. Statistics Canada is expected today to report a jump in overall annual inflation, though the month-to-month increase is expected to be tame.

"From my lens, any inflation we're going to see could be a scare," said David Rosenberg, chief economist with Toronto-based investment firm Gluskin Sheff + Associates. "I just don't think it's going to be sustained, any more than it was in 2008."

At the time, oil soared to $140 (U.S.) and corn prices hit $8 a bushel. "You have inflation in food and fuels. There's no question about that," Mr. Rosenberg said. "Ultimately, what matters is the overall strength of your economy. Will that increase in food and fuels filter through into broader and sustained inflation? It's going to depend on the size of each country's output gap and the extent to which their economies are in an upswing."

In any case, importers are likely to absorb as much of any Chinese hikes as possible, because of the weak consumer market and intense competition. And the price increases may turn out to be relatively minor.

Labour costs make up only a small portion of production costs in China, said Na Liu, founder of CNC Asset Management and an adviser on China strategy to Scotia Capital. And Chinese companies have been making productivity gains that help offset the higher labour costs. And with overcapacity and high unemployment in the industrial countries. "we'll be seeing a lot of margin squeeze. Wal-Mart cannot raise prices by all that's being passed through to them."

Among developed countries, the most vulnerable to a surge in inflation is Japan, Dylan Grice, global strategist with Société Générale SA in London, said in a report to clients on Monday.

"Historically, bankrupt governments have used inflation to alleviate their indebtedness. I doubt things will ultimately be different this time," Mr. Grice said. "I think Japan is the country closest to the edge."

North American and European governments still have time to tackle their debt problems and avoid an inflationary outcome, he said. "I'm not so worried about 'traditional' CPI inflation any time soon," he said. But for Japan, "I think it's already too late."

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